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Ontario’s economic woes worry the West: Goar

A new Fraser Institute report stokes fear that Ontario’s have-not status will suck revenue out of western coffers.

Ontario Finance Minister Charles Sousa, left, and British Columbia counterpart Michael de Jong walk together at a finance ministers meeting last year in Quebec City. Though Ontario's average household income is higher than B.C.'s, Queen's Park receives equalization payments from the feds while the B.C. government does not. (Jacques Boissinot / THE CANADIAN PRESS)

It pains Ontarians to live in a “have-not” province. They liked their old role as the providers of Confederation, the primary generators of national wealth.

It turns out westerners don’t like the change much either. They fear Ontario’s new status as an equalization-receiving province will drain revenue from their coffers and stoke regional tensions.

“Ontario’s crowding out of other provinces in the equalization program may prompt calls for more redistribution from the richer Canadian West and her resource wealth, increased equalization funding, a subsequent increase in federal spending and political rancour among the provinces,” warns Mark Milke of Vancouver’s Fraser Institute in a recently published study. His analysis is part of the think-tank’s ongoing probe of Ottawa’s 57-year-old equalization program.

Ontario fell into the ranks of Canada’s have-not provinces (joining the Maritimes, Quebec and Manitoba) four years ago; the result of a 20-year decline in its manufacturing sector followed by a punishing recession. Its loss of tax revenue made it eligible for equalization, a federal transfer program designed to ensure that Canadians in all parts of the country have comparable levels of public service.

What this means, Milke says, is that the majority of Canadians (71 per cent) now live in equalization-receiving provinces. Before the recession, have-not provinces represented less than a third (32 per cent) of Canada’s population. “This flip in Ontario’s status has had — and will continue to have — profound consequences for the country as a whole.”

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It irritates him as a British Columbian that Ontario with a per-capita household income of $39,273 receives equalization funding whereas his province, which falls on the “have” side of the ledger, gets nothing despite a lower household income per capita of $38,463.

Milke acknowledges that eligibility is based on a province’s ability to generate revenue, not the income of its residents. “That doesn’t make the practical real-world result any less odd,” the economist grouses.

Looking at the national picture, he notes that all four of Canada’s “have” provinces (Alberta, Saskatchewan, B.C. and Newfoundland) are endowed with an abundance of natural resources. The six “have-not” provinces (Nova Scotia, New Brunswick, P.E.I., Quebec, Ontario and Manitoba) are, in his words, “resource-poor either by accident or choice.”

He expects this imbalance to bring calls for a new equalization formula; one that siphons off more of the revenue that resource-rich provinces collect in royalties, licence and permit charges and stumpage fees. “That may portend divisive debates over equalization in the future.”

At the moment, the grumbling is muted. But that may be because Ontario’s share of the equalization pie is quite small and its attitude confuses outsiders. Queen’s Park is anything but grateful, insisting Ottawa is short-changing the province.

The issue will heat up, Milke predicts, as the dimensions of the problem become clear. He doesn’t offer any solutions or recommendations.

The easy answer would be to scrap Canada’s confusing equalization program. But that path is effectively blocked. Equalization is entrenched in the Constitution: “Parliament and the government of Canada are committed to the principle of making equalizations to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”

The next alternative would be to keep the status quo until the tensions become unmanageable. But Prime Minister Stephen Harper’s power base is the West. Ignoring its concerns would carry political risks.

The only remaining option would be to do what governments have done for the past half-century: fix the equalization formula by amending the eligibility rules, rethinking the types of revenue that go into the pot and revamping the web of regulations that supports the program.

Each overhaul has created winners and losers, producing adjustment pains. But Canada is a big, resilient country. Until 2008, Newfoundland was a “have-not” province. Between 1957 and 1965, Alberta received equalization payments. When the program began, British Columbia was the richest province in the land.

Revising the program to reflect current conditions may be messy, disruptive and fraught with difficulty. But that’s how federations stay fair. Canada has done it eight times and survived.

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